Wondering how to make your annual budget for this coming year more than just wishful thinking? These four tips will help take your budget, planning and forecasting process beyond the spreadsheet, improving the process itself while also embedding the proper cause and effect mindset within your people and processes that is critical to achieving better results.
Remember that budgets aren't real. The biggest shortcoming in the budget process of underperforming organizations is the failure to realize that just because you budget for greater revenue or profit doesn't mean that it will actually occur. A budget has no bearing on what will happen within the market or even within your own organization. Too often management, especially senior management, expects that division heads or process owners will translate a financial budget into what actions should be taken on a daily basis to achieve the projected results. Lower-level managers rarely do this. They assist in the once a year budgeting process as mandated by senior managers, they accept the goals set for them (often because they have no choice) and then they go back to doing what they consider their real job. Consider how many companies go bankrupt each year. How many actually budgeted for organization killing negative growth? None. Overcome this flawed thinking by focusing on actions that generate tangible results and that people can identify with.
Focus on making a budget actionable, not accurate. Perhaps because budgets are considered a financial process typically managed by Finance, the primary focus is often on making it accurate. But projections (or goals), by their very nature cannot be accurate. They are simply an educated guess on the expected outcome if everyone in the organization does what is expected. And what is expected is rarely defined within the budget. To overcome this don't stop budgeting at the financial line item level. Take each financial line item (both revenue and expense) at least one step further and budget the expected actions too. Are you seeking a 6 percent growth in revenue in a specific channel or product? If so, how many more customers do you need in the store, advertisements in newspapers or websites or events where you meet prospects to achieve this growth? As you become more sophisticated add one driver per organizational department that influences each line item. Understanding what drives your success and budgeting for those things makes your budget more actionable.
Identify drivers of financial performance. Financial performance is an outcome. It is the results of what was done in the past and as such, is not something that employees can act upon. What they can act upon are those things which will produce future financial results. Expanding on the previous example: scheduling more marketing, sales or events that increase the number of consumers that the organization can touch and potentially turn into customers; improve the sales process so that conversion rates improve; changing product mixes; changing pricing or bundling more effectively; or even improving the product or service offering itself to make it more attractive versus the competition. It also includes those things that satisfy customers, keeps them satisfied and urges them to make additional purchases. These performance drivers can also be budgeted, and would be different for each department: Marketing generates interest, Sales generates customers, Operations satisfies the need and Customer Service or Account Management maintains the relationship and might also cross- or up-sell. Each department's impact upon the successful achievement of these goals should be defined and measured.
Break away from the 'once per year' mentality. Measuring performance drivers cannot be a yearly event and will quickly move the organization into a more proactive form of management focused on influencing future results. Having the relationship between the organization's goals (visualized within a budget in financial terms) and those ways each employee can most influence their achievement, allows employees to clearly see how their daily decisions affect the financial performance of the overall organization -- everyone is therefore working to improve it year round. This makes the organization both more effective and more reactive to necessary changes, eventually leaving behind the yearly budget process to adopt something more akin to a perpetual budget.
The annual budget process gives management a sense of security -- albeit a false one. The act of creating the budget itself is often misinterpreted as the meaningful goal, masking the importance of tangible goals that directly influence the creation of revenue and profit and the reduction of expense. Since data doesn't lie, increased visibility into the organization's performance against these goals (the goal associated with performance drivers) will serves as a much needed check and balance on the organization's hopes that next year will be better -- hopes that often masquerade as a well thought out financial budget. More info at: http://www.davidgiannetto.com/.